The chortle was difficult to suppress, true. Even though as the naira's exchange rate strengthened against major traded currencies a couple of weeks ago, you could tell that it emanated from throats stuck between the sense that the Central Bank of Nigeria (CBN) had somehow chanced on a silver bullet for fixing the country's monetary policy woes, and frisson from a sensation of schadenfreude.
Those commentators who had warned about the naira's continuing vulnerability had apparently come a cropper. Still, the chortling cohort was concerned that inflation did not appear susceptible to the apex bank's new-found charms. Even so, the traditional culprits' fingerprints could be found all over the crime scene. Hoarders, speculators, and myriad economic saboteurs whose machinations have continued to hurt the economy, would be dealt with in time.
However, as with the composition of the mélange of supposedly adverse influencers of the Nigerian economy, the fundamentals of our monetary conditions have barely changed. Inflation remains a problem. At once the result of ornery fiscal policies, and heightened inflation expectations, its key effect is to dissuade market players from holding long naira positions. Then, there is the small matter of the balance on the CBN's external reserves. A "30-day moving average with effect from November 2011", was always a statistical fiction. Add the effects on the reserve balance of the unorthodox monetary policies that the country pursued over the last 10 years, and there was always the worry that the CBN was never going to be able to sustainably put its money where its mouth is on the question of the naira's exchange rate.
The CBN has, admirably, continued to shoot, rapid-fire fashion, even when its arsenal was bare. But the movement to market-based pricing in the foreign exchange markets was only going to go so far. And with domestic prices sticky up, the CBN has still to prove its commitment to maintaining price stability. Does anyone really believe that the CBN can commit to keeping interest rates for as long as it takes to bring the year-on-year rise in the consumer price index to 21%? The whole point of raising the domestic cost of funds as an inflation-fighting tool is to asphyxiate domestic demand. Ideally, therefore, consumer spending, business investment, and government spending ought to fall as part of this process. Bank lending rates will rise, too, regrettably, making borrowing by all sectors of the economy a wee bit more difficult.
On the bright side, rising interest rates mean that a larger portion of government's spending will go towards debt servicing, ensuring (with a hope and prayer) a better disciplined public expenditure framework. That said, rising interest rates have the unfortunate additional effect of raising businesses' costs, pushing marginal operators out of business, and bloating banks' portfolios of non-performing loans. Might this also be a path to financial sector distress.
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Arguably, therefore, the naira's most recent appreciation did not happen on a whim. However, the financial markets have fully priced in the successive market-based reforms that we have witnessed since the Tinubu government was sworn in. In the absence of further reforms or a serious tidying up of our fiscal space, the naira's return to the depreciation path should not have come as a surprise. Nonetheless, it appears to have rattled Nigeria's legion of social media experts on the economy. It probably has boosters of the current federal government on the back foot, too.
If the argument, here, is that the fundamentals that underpin price discovery in the foreign exchange markets have not changed, the concern that now needs to be stated is that the naira's return to losing value against most traded currencies may, unfortunately, foreshadow recourse to unorthodox economic policy in both our monetary and fiscal spaces. Over the more than 60 years since our flag independence, it has been far more convenient after extensive griping at the cost, and time-inconsistency of reform efforts, to revert to norm -- in this case a belief in Nigeria's exceptional status ("The provisions of economic theory somehow were not arrived at with Nigerians in mind"). We may think what we like in explaining or justifying unpleasantness, but the truth is that managing our economy requires a Daniel Barenboim in charge of our orchestra. But key sections of our score are empty.
Uddin Ifeanyi, journalist manqué and retired civil servant, can be reached @IfeanyiUddin.
